IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/1343.html
   My bibliography  Save this paper

Strategic interdependence in the East-West gas trade : a hierarchical Stackelberg game approach

Author

Listed:
  • Grais, Wafik
  • Kangbin Zheng
  • DEC

Abstract

The current and potential benefits of the East-West gas trade are enormous for all participants. Realizing those benefits requires significant upfront investments. But the new, more complex structure of the gas transit system that has emerged following changes in Eastern Europe and the former Soviet Union has created uncertainties that bear on the expected benefits from investment. The authors argue for the existence of stable contracts that would create an environment more conducive to investments and allow all participants to benefit from expansion of the gas trade. As a guide to formulating incentive-compatible, transparent, flexible contracts, they propose a framework based on a Stackelberg game, with three players (a supplier, a transiter, and an importer) under Russia's leadership. They use this framework to analyze the contract modifications that would ensue from changes affecting the gas trade. They concluded that: (a) increased competitiveness of the transiter and supplier through cost reductions would improve the payoffs to all players (the transiter's and supplier's profits and the Western importer's welfare). Strategic behavior on the part of the supplier and transiter would ultimately reduce the price to the importer, enlarging gas demand and reducing costs. If increased competitiveness is the outcome of more costly gas from sources other than Russia, both the supplier's and the transiter's payoffs would improve but the importer's welfare would deteriorate. The supplier and transiter would have leeway to strategically raise their price and transit fee, respectively, while gaining market share. But the importer would face rising costs for gas imports and would lose welfare; (b) an increase in the scope for the importer to substitute between alternative sources of gas improves welfare for all three players. The perception by the supplier and transiter of increased threat of competition leads to a preemptive move not to lose market share. The transiter and supplier reduce the transit fee and supply price, respectively, allowing the importer to face a lower gas price. Import demand expands and welfare improves. The expanded trade more than compensates for the reduction in the transit fee an supply price and allows larger payoffs for transiter and suppliers; and (c) the perception of increased reliability of Russian gas supplies expands demand for Russian gas and leads to the expansion of trade. The supplier and transiter can raise their respective charges with expanded volume, improving their payoffs. The importer's welfare deteriorates as the cost of importing gas rises. The predictability of the players'reactions to changes in the environment would build confidence in the reliability of gas trade and allow its expansion benefiting all participants.

Suggested Citation

  • Grais, Wafik & Kangbin Zheng & DEC, 1994. "Strategic interdependence in the East-West gas trade : a hierarchical Stackelberg game approach," Policy Research Working Paper Series 1343, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1343
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1994/08/01/000009265_3970716141615/Rendered/PDF/multi_page.pdf
    Download Restriction: no

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1343. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: http://edirc.repec.org/data/dvewbus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.